Hindalco Industries - Best placed in the sector - ICICI Securities

Hindalco has reported better-than-expected Q1FY21 earnings. Aluminium EBITDA surprised on the back of better cost control. Cost of production (CoP) of aluminium business declined ~6% QoQ. Thus, despite realised LME (with hedges) declining from US$1852/te to US$1589/te QoQ, integrated spreads fell from US$457/te to US$388/te. This is despite significant increase in exports and a meaningful drop in value-added production mix. The nature of the beat would have been more substantial, but copper operations disappointed. Copper EBITDA declined ~85% YoY - a combination of lower volumes (down 29% YoY), lower by-product prices as well as lower TC. Integration of Aleris has resulted in an increase in net debt to Rs620bn (against Q1FY21 consolidated EBITDA of Rs19.3bn); should come progressively with the sale of Duffel and Lewisport assets. We maintain BUY.

- Cost of aluminium production continues to decline; has reached the bottom in Q1FY21. Indian aluminium EBITDA (including Utkal) was flat YoY at Rs8.9bn; EBITDA/te expanded YoY from US$208/te to US$234/te despite realised aluminium realisation declining by ~US$529/te during the same period. Realised LME also fell from US$1860/te to US$1589/te during the same period, a drop of US$276/te. And, not to forget, Q1FY21 witnessed margin headwinds in the form of higher exports (60%) and lower value-added product sales (fell 55% YoY). This implies a 25% YoY reduction in costs. Even if we adjust 9-10% benefit from exchange devaluation, CoP (US$) has trended down by 15% in the past one year - majorly helped by commodity prices. As LME prices move up, so will costs - barring power costs component within the country.

- Copper profitability set to improve. EBITDA declined 85% YoY to Rs 370mn. Copper metal sales were down 29% YoY, while cathode sales were down 51% YoY to 31kte. There has been a sharp reduction in sulphuric acid prices which impacted EBITDA. Also, higher DAP demand was met through imports. There are scheduled shutdowns in copper smelters in Q3 and Q4FY21. Copper smelter performance has deteriorated due to declining TCs and by-product credit. Chinese TCs have crashed due to issues with supply of copper concentrate (Peru) and restrictions on copper scrap imports. TCs can only improve from here on. But we do believe, looking at the past performance of Dahej, management intervention is needed to improve operational efficiency of the smelter as well - perhaps through targeted capex.

- Maintain BUY. Increased contribution from Novelis and Aleris, not only reduces EBITDA volatility, but has also started to improve business RoEs. We work with LME estimates to US$1900/te; improved RoE profile of >9% allows us to value Hindalco at 0.77x P/B (FY22E). We have increased aluminium EBITDA for FY21E given the resilient Q1FY21 performance.

Shares of HINDALCO INDUSTRIES LTD. was last trading in BSE at Rs.193.35 as compared to the previous close of Rs. 184.9. The total number of shares traded during the day was 1420262 in over 6369 trades.

The stock hit an intraday high of Rs. 193.55 and intraday low of 184.75. The net turnover during the day was Rs. 268313282.

Source : Equity Bulls

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